?I?d rather own silver than Toyota in an environment like we are having now,? said Jim Rogers, CEO of Rogers Holdings.
I am writing this from the polished teak floored, white columned, veranda of the historic Raffles Hotel in Singapore. Exotic tropical birds with huge curved bills are calling each other from the betel nut trees. I am somewhat peeved, as the Sir Stamford Raffles Suite which I have reserved is not yet available. A visiting head of state shacked up with his mistress has overstayed his booking, and the hotel is afraid to boot him out, lest they cause an international incident.
The manager couldn?t be more apologetic, and mollified me with a complimentary breakfast, $300 worth of spa credits, and unlimited use of the hotel limo for the duration of my stay.
I was in a crabby mood to start with. Singapore Airlines screwed up my booking, so instead of getting the full length bed I was expecting for the eight hour overnight flight from Brisbane, Australia, I ended up with a less than compromising standard business class seat. By the time I landed at 6:00 am the next morning, I was so sore that I felt I had just played for the losing Australian team in their rugby world cup match against New Zealand?s unbeatable All Blacks. The things I do for this letter.
When I walked out of the cavernous airport, the humidity slapped me in the face, fogging up my glasses. With Singapore a scant one degree and 22 minutes north of the equator, I arrived at the height of the Northeast monsoon, and it was 90 degrees and raining.
And the dawn rose like thunder.
Every time I poke my foot out the door, a deafening clap of thunder struck and a torrential downpour ensued, sending palm fronds flying. So this will be a writing day.
On arrival, I did what all returning Singaporeans do in time honored tradition. I went to McDonalds and had a sausage and egg McMuffin. Meet the face of globalization.
Meet The Happy Face of Globalization
Singapore has been an economic miracle for as long as I can remember. It was the first place American electronics multinationals offshored during the 1960?s, when China was still locked up tighter than a drum and in the throes of the Cultural Revolution. Since then, the country made itself an entrep?t of international trade. It is the region?s largest oil refiner. It created an educated and efficient workforce that was the springboard to making Singapore a major services hub for banking and securities markets.
Private technical schools are absolutely everywhere, and sociology majors are far and few between. Not a penny was spared on the construction of its impressive infrastructure. Much of the Asian bulk shipping fleet lies at anchor, loading, unloading, or awaiting charters, drawn by world class ship repair facilities. When the Middle Kingdom finally joined the globalization gravy train, Singapore caught the spillover. The island nation of 3 million is now one of the leading centers for the management of the immense wealth earned by high net worth Chinese. The place is swimming in money. Singapore ranks 14th in the world in imports, 15th in exports, and is the 5th busiest port in the world. Inhale here, and you are tasting the intoxicating air of prosperity.
The credit for much of this success can be laid at the feet of the autocratic former Prime Minister, Lee Kwan Yew, who ruled the country with an iron fist for 23 years. Littering can still earn you a public flogging with a painful rattan. I still hold a grudge against Mr. Lee because he regularly locked up friends of mine at The Economist and the now defunct The Far Eastern Economic Review whenever they ran an editorial he disagreed with. Still, it?s hard to argue with success.
This year, Singapore?s GDP will grow a blistering 5%-6%, a rate Americans would kill for. Inflation is rising at 5%. The Singapore dollar, now worth 81 cents, is as good as gold, and has been rising consistently for 40 years. Singapore ten year government bonds, yielding a mere 1.62%, are one of the few top sovereign credits still out there. They are one of handful worth buying in the world, along with those of Brazil, Australia, and New Zealand. Needless to say, Singaporean stocks (EWS), bonds, and currency have all been favorite hedge fund targets for years. They are ?RISK ON? trades with a turbocharger. Buying stock exposure there at recession lows, such as through the ETF (EWS), has been a multi decade winner, and will continue to be so for the foreseeable future.
The Raffles has been a crossroads for Asian travelers since it was built by four Armenian Brothers in 1887. Rudyard Kipling, Somerset Maugham, and Noel Coward were regular residents. A tiger was shot in the billiard room in 1902. The ?Singapore Sling? was invented in its famous Long Bar, just off Cad?s Alley, as a polite way for women to drink gin. During WWII, my late father-in-law, Masao Taguchi, was stationed here as a paymaster for the Japanese Army.
I first stayed at the Raffles in 1974, when the floorboards sagged, the threadbare carpets threw off a musty smell, and the white plaster was peeling off the mildewed walls. I used to play billiards there with the war correspondents covering the dying embers of the Vietnam War, the felt on the enormous tables frayed and insulted with countless cigarette burns.
In 1991, the hotel underwent a down to the foundations reconstruction, and was later sold to the government of Dubai. Today it is considered one of the best hotels in the world, along with the Cipriani in. Service is offered here in the extreme, my personal butler, Alvaro, assigned to me upon check in (yes sir, no problem getting those suits pressed and shoes shined in 20 minutes). The same billiard tables are still there, with new felt to boot.
I Last Played Here in 1974
Singapore also amazes observers with its ambitious social experiment. This was a malarial swamp when the British East India Company set up a trading post in 1819, so everyone here is from somewhere else. Today, the population is evenly split between the decedents of British colonials, overseas Chinese, Indians, and Malaysian bumiputras.
It is fascinating listening to the locals communicating with each other in fractured versions of the national language, English, which is really of form of pidgin. Even the local Chinese dialect blends in a lot of random English words. The racism of the colonial past has long since disappeared. Today everyone seems to get along, worshipping the common god of commerce.
Check Out My New Digs
My Singapore Global Strategy luncheon was a blowout success, with late minute additions packing the room at the American club beyond its legal capacity. Was it something I said? Afterwards, one reader invited me to sail with him from Phuket to Penang next time I was in town. I asked if this was safe, since the Straits of Malacca were invested with pirates. Having covered their depredations on the Vietnamese boat people during the seventies, I know them too well as a savage and pitiless bunch. He said yes, that was true, but as long as they were paid off in advance, they left you alone. That worked for me, as it was better than the alternative. No kidding.
I spent my last night in the island nation as the dinner guest of some local magnates and soldiers of fortune. Note to self: never tell the Chinese you?ll eat anything. The Peking duck, peppered crab, and the rare, raw Canadian geoduck shellfish were excellent. However, I passed on the monkey brains and snake bile, citing my doctor?s admonition to avoid these delicacies due to their high cholesterol content.
?As my plane taxied downed the runway for takeoff, I wondered how many bones of allied soldiers we were passing over. My late friend, James Clavell, spent 3 ? years here at the notorious Changi POW camp during WWII. His ordeal became the basis for the bestselling novel and Hollywood film, ?King Rat?.
I asked the flight attendant if we would pass over Vietnam and Cambodia on the way to Hong Kong. When she said ?yes?, the first thing that came to mind was ?Damn, hope we don?t can catch another burst of machine gun fire again.? There are still bits and pieces of me down there, and whenever I pass by the neighborhood, they speak to me.
Oh, and if anyone needs pirates in the Straits of Malacca dealt with, just send me an email. I?m your guy.
?To be right when a large government is wrong can be very dangerous,? said Benjamin Franklin.
?The problem is that we have an analogue political culture in a digital word,? said former news anchor, Tom Brockaw.
Desperate homeowners counting on a "V" shaped recovery in residential real estate prices to bail them out better first take a close look at global demographic data, which tells us there will be no recovery at least another 15 years.
I have been using the US Census Bureau's population pyramids as long leading indicator of housing, economic, and financial market trends for the last four decades. They are easy to read, free, and available online at http://www.census.gov/ . It turns out that population pyramids are something you can trade, buying the good ones and shorting the bad ones. For example, these graphical tools told me in 1980 that I had to sell any real estate I owned in the US by 2005, or face disaster. No doubt hedge fund master John Paulson was looking at the same data when he took out a massive short in subprime loans, earning himself a handy $4 billion bonus in 2007.
To see what I am talking about, look at the population pyramid for Vietnam. This shows a high birth rate producing ever rising numbers of consumers to buy more products, generating a rising tide of corporate earnings, leading to outsized economic growth without the social service burden of an aged population. This is where you want to own the stocks and currencies.
I?m Avoiding Japan Like the Plague. Now look at the world's worst population pyramid, that for Japan (EWJ). These three graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties, which I remember well, when Japan had your textbook high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why.
By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every wage earner will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, collapsing bond markets, a depreciating yen, and terrible stock and housing markets. If you are wondering why I believe that a short position in the yen should be a core position in any portfolio for the next decade, this is a big reason. Dodge the bullet. Enjoy their food and hot tubs, but not their stocks.
Brace yourself. The US is turning into Japan. (SPX) As a silver tsunami of 80 million baby boomers retires, they will be followed by only 65 million from generation "X". The intractable problems that unhappy Japan is facing will soon arrive at our shores. Boomers, therefore, better not count on the next generation to buy them out of their homes at nice premiums, especially if they are still living in the basement rent free. They are looking at best at an "L" shaped recovery, which is a polite way of saying no recovery at all.
What are the investment implications of all of this? Get your money out of America, Europe, and Japan, and pour it into Vietnam, China, India, Brazil, Mongolia, Indonesia, Mexico, Malaysia? and other emerging markets with healthy population pyramids. You want the wind behind your investment sails, not in your face with hurricane category five violence. Use any serious dip to load the boat with the emerging market ETF (EEM) and individual emerging market ETF?s.
The ?Graying? of America Bodes Ill for Investors
Vietnam is a Paradise for Demographic Investors. Now that we have figured out that Vietnam is a great place to invest, take a look at the Van Eck Groups Vietnam Index Fund (VNM). The venture invests in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its offshoring, as wages there are now one third of those in the Middle Kingdom.
Vietnam was one of the top performing stock markets in 2009. It was a real basket case in 2008, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. If they can only get their inflation under control then they could be a real winner.
I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on a long vacation. If you are looking for a laggard emerging market that has not participated in this year?s meteoric move up, this one fits the bill nicely. Their green shoots are real. But watch out for the old land mines.
There is a Happy Ending for the US. Unlike Japan, the US is not plunging into a multigenerational black hole. After the 80 million baby boomers are long gone, and 65 million Gen Xer?s have picked up homes at rocked bottom prices, they will be followed by 85 millennials, those who are now in the early twenties. When this generation reaches its speaking spending years, starting around 2025, they will have to chase the limited housing stock offered for sale by the Gen Xer?s.
As there will be a shortfall of 20 million homes, this should spark one of the greatest bull markets in residential real estate of all time. Furthermore, there will also be a severe labor shortage in America, leading to soaring wages and a reversal of a then 40 year long decline in American standards of living. We could see the return of a golden age similar to what we last saw in the 1950?s. So use the next leg down in residential real estate triggered by the next recession and the crash of 2012-2013 to pick up a home at a knocked down, distressed price. It could mark a century low in real house prices.
?When I came into Disney, it was a brand, yes, but a museum mostly. It?s was not all about Pinocchio and Snow White. We had to look forward,? said Michael Eisner, the former CEO of Walt Disney (DIS).
I received an urgent call from my friend at Fidelitrade (http://fidelitrade.com/) this morning, a leading dealer in 1,000 ounce bars of gold and silver. He had just been cleaned out of the 1,000 ounce silver bars at $34,930 each, and there was nothing in the pipeline. What the hell was going on with silver?
I tried to calm him down with my usual measured, rational, global, cross asset class explanation, and made the following points:
*An interim solution, or at least some progress, seems imminent in the European debt crisis. Any solution means a European style quantitative easing and a TARP, and we here in the US already know how positive those can be for risk assets.
*My friend at the Swiss National Bank told me yesterday that this resolution should send the Euro down to parity against the dollar (click here for ?Get Ready to Short the Euro Again?). This is prompting massive European buying by panicky individuals across the entire precious metals spectrum. That?s where his silver 1,000 ounce bars went.
*Now that gold is, in effect, a paper asset, it can ride on the coattails of American stocks in a rally that now looks to carry on until year end, and possibly into January.
*My meeting with the Chinese government last week confirmed my belief that the People?s Bank of China is going to sit on the bid for gold and silver looking to increase their holdings of hard assets as a hedge against a weak dollar in a future recession. At least this is what I told them to do.
*When I went to buy a stack of Chinese one ounce silver panda coins in Shenzhen, there was a one hour wait at the store. I usually buy a dozen of these to use as tips and bribes to buy my way across the Middle Kingdom to get the information I need. When I asked others in line why they were buying, they told me they were moving money out of real estate into silver because of the recent sharp markdowns in new condo prices. Gold coins are too expensive for someone who earns only $500 a month.
*Gold seems to be taking another run at the old high of $1,922. If the ?RISK ON? trade continues, it might even make it. Then the hot money will rotate into the next natural target, silver, which has so far lagged gold?s move. That makes silver a great ?catch up? play.
*The technical set up for silver is looking really interesting. As I write this with the (SLV) at $33.60, it looks like we are just about to break the 50 day moving average to the upside. If successful, then the 200 day moving average at $35.60 is a chip shot. Break that, and we could fill in the $10 of air on the chart created by the September crash and gap all the way up to the old high, just short of $50.
*Having discounted a recession over the summer that was never going to happen, risk assets are now ?undiscounting? it.
*In the meantime, economic data across a broad front are going from flat to showing a gradual improvement. Corporate earnings that were expected to grow at 13% actually came in closer to 17%. Since 50% of the final demand for silver is for industrial purposes, this is a great play on a recovery.
*Traders are getting sick to death of listening to all of this BS about Europe, which is largely being exaggerated by journalists jonesing from free continental vacations. Ignore Europe, just buy the dips in all risk assets, and turn off CNBC.
My friend said thanks, and indicated that he would spend the afternoon scouring the marketplace for more silver bars and coins of any description, promising to renew his subscription to Macro Millionaire.
The conversation prompted me to do a quickie analysis of the options market and look for some inviting plays. Since I am 80% in cash, and up 47% on the year, I have plenty of room to take a flyer here. That led me to the Silver ETF (SLV) January $35 calls. Here are the numbers I came up with:
*A run up to just the 200 day moving average takes the $35 calls to $3.00, up 33%.
*A move to fill the September gap takes silver to $39 and the options to $5.00, up 120%.
*A run to the old high under $50 takes the options to $15, assuming there is no time premium left by the time we get there, a return of 670%.
I am going to use a stop loss here of $30 on the underlying. Those who can?t do options, just buying the (SLV) ETF outright here makes a ton of sense. Adrenaline junkies can even consider the double leveraged silver ETF (AGQ). Just make sure you fasten your seat belt.
The Silver Panda
Please Take a Number and Wait in Line
I have an unusually sensitive nose. Maybe that is because it is so big. It is particularly attuned to detecting bullpucky in broker research reports. So when an analyst recently downgraded the mid-level broker, Jeffries & Co (JEF), on the back of its European debt exposure, the stench was overwhelming.
I went to the website at http://www.jefco.com/ and had a quick look at the balance sheet and income statement. The leverage was a conservative 12:1 and earnings were growing nicely. But when I looked at the chart, it had chapter 11 written all over it, the stock plunging 40% in days. Things were just not adding up.
So I called someone I knew in senior management. The European problems were being vastly exaggerated. Total positions amounted to 2% of assets, and these were all fully hedged, both by underlying security and duration. The firm was about to post its entire European portfolio on its website with every detail, down to the last CUSIP number, an unprecedented level of disclosure. There is no need for an emergency dilutive capital raise whatsoever. What?s more, he only knew of one client in his department who had pulled funds in the past week, and he would probably return, once the dust had settled.
It all had the makings of a classic bear raid to me. This is where some opportunistic traders spread false rumors about the health of a company in the hope of making some quick profits on the short side. With MF Global, once the world?s largest future broker, having gone bust on Monday, the market was particularly sensitive to this kind of news.
With any luck, a panic will ensue causing the decline to snowball and quickly take the share price to zero. If a few thousand people lose their jobs, and a few tens of thousands of shareholders get wiped out, that is tough luck. Such are the cruel and heartless ways of Wall Street in search of the eternal buck.
However, given JEF?s bold and decisive action, I didn?t think the bears would be successful this time. And, to me, that spells opportunity with a capital ?$O$?.
If the rest of the market reaches the same conclusions that I have, then the stock is poised to rocket. At the very least, it could rapidly return to the pre-rumor level of $15.50. That would cause the January, 2012 $11 calls to double from my current cost of $2.40. If Europe cools off a bit and the market and global risk assets take another leg up, you could get a lot more.
This is still a financial, a sector that I am not exactly enamored with. So I am going to limit this position in the calls to only a high risk allocation of 2.5% of my portfolio. There are still plenty of black swans out there looking for a place to land. For my notional ?virtual? $100,000 fund, this amounts to 10 contracts ($2,500/100/$2.40). With any luck, we?ll be out of this next week.
Newsletter subscribers should note that this is a trade alert that went out from my Macro Millionaire Service at opening last Friday, November 4, when the stock was trading at $11.30. Yes, this is the program with the model portfolio that is up 47% year to date. For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put ?Macro Millionaire? in the subject line, as we are getting buried in emails. Hurry up, because our software limits the number of subscribers, and we are running out of places.
You are Cleared for Landing
?The bond markets are telling the truth about the financial markets right now. It?s not being told by the equity markets,? said Constance Hunter, chief economist at Aladdin Capital Management of bond house.
When I first bought shares in the Chinese electric car manufacturer, BYD (BYDDF) (or Build Your Dreams) in 2009 on the heels of Warren Buffet?s 10% investment, it looked like a total home run. The stock soared from $1.50 to $11, given me a paper return of 730%.
Undercover, I Totally Blend
Last year, the stock started to roll over, retracing all the way back to my cost. I called the company?s Los Angeles office, but the line was disconnected. I tried the New York office, but my call was never returned. An email I sent their headquarters in Shenzhen, China went unanswered. I even had a friend in the Chinese government make some inquires, and he told me the company wasn?t seeing anyone.
That?s it! Off with the gloves. No more Mr. nice guy. I did what I usually do when a company I follow won?t talk to me. I fly to their headquarters and break into the facility.
It was easier than you think. I simply pulled up to the main gate in Northern Shenzhen and told security that I was a friend of Mr. Buffet and was there to see Mr. Li. They waved me through and went scurrying to find the appropriate Mr. Li. I knew full well that in a company of 100,000, at least 10,000 had to be named Mr. Li, and by the time they figured out that there was no Mr. Li, I would be long gone. It worked like a charm.
This Could Be Your Next Car
At this point, my editor is saying, ?You did what!?? Indeed, my staff worries about my antics from time to time, fearing the dole if I fail to return from one of my adventures. But the nine life limitation that cats face doesn?t seem to apply to me, so I just keep on going.
I then set off and roamed the factory floors freely, stopping workers wherever I could and asking about conditions. The great thing about this approach is that the man on the assembly line, in R&D, and the girl in accounting are totally unfamiliar with management?s sanitized view for public consumption, and haven?t been professionally trained to lie. As a result, I was able to get a first class read on the state of the company.
E-Taxis
When I met with the Shenzhen venture capital community in the days before, the rumors were rampant. When founder and CEO, Wang Chuanfu, launched his assault on the global car market three years ago, expectations were high. He promised investors, like Berkshire Hathaway?s Charlie Munger, that BYD would soon become the world?s largest car manufacturer. He ramped up production from 500,000 vehicles to 800,000 in 2010, anticipating a huge demand for the company?s conventional cars and hybrids.
But quality issues persisted, and the resale rate to past BYD car owners fell to zero. Sales peaked at just over 500,000, leaving the company with a huge inventory of unsold vehicles. Profits collapsed. Mercedes was brought in to provide technical assistance, but has so far been unable to improve sales. Was BYD going under? Was Warren Buffet pulling his investment? Speculation was rife.
One salesman told me that the information blackout was ordered not due to any financial problems, but because the company was releasing its new, all electric Model E6 the following week. This car is much larger than other electric cars, gets an amazing 186 miles per charge, and will be offered for sale for $39,000 after government incentives.
If true, this would be a revolutionary, highly disruptive advance. BYD plan to export the car to the US as soon as possible. It has already been test driving a fleet of ?E-Taxis? on the streets of Shenzhen for the past 18 months, with much success. If the company cans delivery on the vehicle, Wang Chuanfu might realize his ambitious goals after all.
China currently subsidizes energy prices, with gasoline available for about $3.50 a gallon, or 10% lower than US prices. That means a smaller cost advantages for alternative car producers. That disadvantage could disappear during the next oil price spike. Government subsidies will also eventually have to disappear because they are too costly.
Finally, after two hours of scouring the grounds, inspecting the physical remains of their crash tests, inspecting the assembly line, and peeking through windows, I was ready to go. There once was a day when I could have been put in front of a firing squad for doing something like this. But the People?s Republic has grown soft in its old age, and I figured that, worst case, I would just get kicked off the grounds. Not, so for my Chinese staff, however, who were sweating bullets and begging me to leave.
So what are investors to take away from this? For a start, you run out and buy tsunami afflicted, beaten down Nissan Motors (NSANY). If BYD can squeeze 186 miles out of its batteries, so can Nissan, and there is already talk that the second generation all-electric Leaf will reach that target. That will eliminate the ?range anxiety? afflicting current owners with their 80 mile limitation.
As for BYD itself, the story is a little more complicated. At this share price, you are essentially getting a world class multinational lithium ion battery company with the car company thrown in for free. If the car division continues to sputter along, you can expect modest appreciation in the shares. But if the E-6 becomes the next big car of the future, the stock could go ballistic and potentially make a new high, delivering investors a multi bagger.
Whoa, That Was Close